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Update on economic and monetary developments


The information that has become available since the Governing Council’s monetary policy meeting in March confirms slower growth momentum extending into the current year. While there are signs that some of the idiosyncratic domestic factors dampening growth are fading, global headwinds continue to weigh on euro area growth developments. The risks surrounding the euro area growth outlook remain tilted to the downside, on account of the persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets. At the same time, further employment gains and rising wages continue to underpin the resilience of the domestic economy and gradually rising inflation pressures. However, an ample degree of monetary accommodation remains necessary to safeguard favourable financing conditions and support the economic expansion, and thus to ensure that inflation remains on a sustained path towards levels that are below, but close to, 2% over the medium term. Significant monetary policy stimulus is being provided by the Governing Council’s forward guidance on the key ECB interest rates, reinforced by the reinvestments of the sizeable stock of acquired assets and the new series of targeted longer-term refinancing operations (TLTROs).

Survey indicators of global economic activity have weakened in the first quarter of 2019. In particular, global trade has continued to slow down amid the turning of the global industrial cycle and heightened trade tensions. Global inflation has subsided in the first months of this year, largely on account of a lower contribution from the energy component.

Euro area government bond yields overall declined somewhat as global risk-free rates decreased and the EONIA forward curve shifted downwards. Developments in sovereign bond spreads exhibited some heterogeneity across the euro area. Equity prices rose amid lower risk-free rates and stable and low volatility. Accordingly, yield spreads on corporate bonds narrowed. In foreign exchange markets, the euro remained broadly unchanged in trade-weighted terms.

Euro area real GDP rose by 0.2%, quarter on quarter, in the fourth quarter of 2018, following an increase of 0.1% in the third quarter. Incoming data continued to be weak, mainly on account of the slowdown in external demand, compounded by country and sector-specific factors. As the impact of these factors is turning out to be somewhat longer-lasting, the slower growth momentum is expected to extend into the current year. Looking ahead, the effect of these adverse factors is expected to unwind. The euro area expansion will continue to be supported by favourable financing conditions, further employment gains and rising wages, and the ongoing – albeit somewhat slower – expansion in global activity.

According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.4% in March 2019, after 1.5% in February 2019, reflecting mainly a decline in food, services and non-energy industrial goods price inflation. On the basis of current futures prices for oil, headline inflation is likely to decline over the coming months. Measures of underlying inflation have remained generally muted, but labour cost pressures have strengthened and broadened amid high levels of capacity utilisation and tightening labour markets. Looking ahead, underlying inflation is expected to increase gradually over the medium term, supported by the ECB’s monetary policy measures, the ongoing economic expansion and rising wage growth.

Regarding monetary developments, broad money (M3) growth increased to 4.3% in February 2019, from 3.8% in January. M3 growth continues to be backed by bank credit creation and the narrow monetary aggregate M1 remained the main contributor to broad money growth. The annual growth rate of loans to non-financial corporations rebounded to 3.7% in February 2019 and has moderated in recent months, reflecting the typical lagged reaction to the slowdown in economic growth. The annual growth rate of loans to households remained broadly unchanged at 3.3% in February. The euro area bank lending survey for the first quarter of 2019 suggests that overall bank lending conditions remained favourable.

Combining the outcome of the economic analysis with the signals coming from the monetary analysis, the Governing Council concluded that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.

On the basis of this assessment, the Governing Council decided to keep the key ECB interest rates unchanged and continues to expect them to remain at their present levels at least through the end of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.

The Governing Council confirmed that the Eurosystem will continue to reinvest, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when the Governing Council starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

The precise terms of the new TLTRO series will be communicated at one of the Governing Council’s forthcoming meetings. In particular, the pricing of the new TLTRO-III operations will take into account a thorough assessment of the bank-based transmission channel of monetary policy, as well as further developments in the economic outlook. In the context of the ECB’s regular assessment, the Governing Council will also consider whether the preservation of the favourable implications of negative interest rates for the economy requires the mitigation of their possible side effects, if any, on bank intermediation.

The Governing Council reiterated its readiness to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.

External environment

Global survey indicators point to some deceleration in global activity in the first quarter of 2019. The global composite output Purchasing Managers’ Index (PMI) excluding the euro area rose in March (see Chart 1), as an increase in the services sector more than offset a marginal decline in manufacturing. In quarterly terms, however, the PMI in the first quarter of 2019 is below the level recorded in 2017 and the first half of 2018, consistent with some deceleration in the global growth momentum. Across advanced economies, the US Markit PMI was broadly unchanged while the all-industry survey indicator published by the Institute for Supply Management (ISM) declined from rather high levels during the first quarter. PMIs also decreased in the United Kingdom and Japan, on the back of weaker readings in March. In emerging market economies, the quarterly PMI picked up strongly in Brazil, while decreasing in India and Russia. The PMI remained unchanged in China in the first quarter, although it recorded a strong increase in March.


Chart 1

Global composite output PMI

(diffusion index)

Sources: Haver Analytics, Markit and ECB staff calculations.
Notes: The latest observations are for March 2019. “Long-term average” refers to the period from January 1999 to March 2019.

Global trade indicators signal a continued weakness at the start of the year. The volume of merchandise imports decreased by 1.9% in January 2019, in three-month-on-three-month terms, particularly on account of sharp declines in Asian countries. This decrease is partly related to the significant volatility of Chinese trade data around the Lunar New Year, which makes it difficult to interpret the January data. At the same time, the PMI new export orders remained below the expansionary threshold in March (see Chart 2). A broader measure, based on a principal component of leading indicators of global trade, qualifies this picture and points to a marginal increase in world trade in the first quarter of 2019, following subdued developments in the second half of last year.

The ongoing slowdown in world trade is partly driven by the turning of the global industrial cycle. A maturing global business cycle typically leads, via lower investment activity, to a moderation in global trade. This pattern has been amplified at the current juncture by the fact that much of the weakness in the global economy has been concentrated in industrial activity. In fact, the industrial and trade cycles tend to be highly correlated.


Chart 2

Global trade and surveys

(left-hand scale: three-month-on-three-month percentage changes; right-hand scale: diffusion index)

Sources: Markit, CPB Netherlands Bureau for Economic Policy Analysis and ECB staff calculations.
Note: The latest observations are for January 2019 for global merchandise imports and March 2019 for the PMIs.

World trade has also been affected by other factors, including heightened trade tensions. US imports from China have fallen particularly sharply in the industries affected by the tariffs, but a sharp moderation has also occurred across other Asian economies. While this could be a sign of weaker domestic demand in China, it could also be the result of industry-specific developments, particularly in electronic products and cars. Both sectors are highly trade-intensive and have a high share in Asian trade. Box 1 discusses the role that a maturing tech cycle may have played in the trade slowdown observed in China and other key Asian economies.

Global inflation remained stable in February. Annual consumer price inflation in the Organisation for Economic Co-operation and Development (OECD) countries remained unchanged in February at 2.1%, following a sequence of declines since the peak registered in October last year. Excluding food and energy prices, OECD annual inflation slowed marginally to 2.1%. Tight labour market conditions across major advanced economies have so far translated into only moderate wage increases, suggesting that the underlying inflation pressures remain subdued. Looking ahead, inflation is expected to remain subdued in the short term, while diminishing spare capacity at the global level is expected to support underlying inflation in the medium term.

Oil prices have continued to increase since mid-March. After the surge in mid-February, which followed the release of data showing an improvement in OPEC+ compliance with its supply-cut agreements, oil prices have risen further since early March to a level of around 70 USD/barrel. After OPEC+ reset its two-year-old agreement at the end of last year in an effort to reduce oil supply, overall production by the cartel has decreased since January 2019. Moreover, US sanctions against Iran and Venezuela continued to affect supply, exacerbated further by power outages in Venezuela, which weighed on output. Among non-oil commodities, metal prices and food prices have remained broadly unchanged since early March.

The expansion in the US remains sustained, but shows signs of maturing. US real GDP expanded at an annual rate of 2.2% in the fourth quarter of 2018. The increase in real GDP in the fourth quarter mainly reflected positive contributions from private consumption and non-residential fixed investment, while the contributions from net exports and government spending were negative. While overall GDP growth remains supported by strong fundamentals, economic activity is expected to decelerate in the first quarter of this year, amid one-off adverse factors – such as the partial government shutdown – and mixed incoming data. At the same time, inflationary pressures remain contained, in spite of rising wages. Annual headline CPI inflation slowed down slightly to 1.5% in February. The decline in inflation was mainly driven by a sharp drop in energy prices. CPI inflation excluding food and energy prices dropped marginally to 2.1% in February. By contrast, in line with a tight labour market, average hourly earnings rose by 3.4% year-on-year, continuing an upward trend that started in 2015.

Economic activity slowed in Japan in early 2019, following a rebound towards the end of last year. Real GDP increased by 0.5%, quarter on quarter, in the fourth quarter of 2018, mainly supported by domestic demand, particularly non-residential investment. However, high frequency indicators point to a slowdown in underlying momentum at the start of the year. Industrial production was very weak, currently standing below the Q4 2018 levels. January-February average real goods exports are lower than last year, suggesting ongoing weakness in external demand. Consumer price inflation continued to slow at the start of 2019, largely reflecting developments in food and energy prices. Annual headline inflation declined to 0.2% in both January and February, reflecting mostly a decline in the energy price contribution and strong declines in fresh food prices. Core inflation (i.e. excluding food and energy) has picked up slightly to 0.3%.

In the United Kingdom, GDP growth slowed markedly in the final quarter of 2018 in an environment of high uncertainty related to Brexit. Quarterly real GDP growth slowed to 0.2% in the fourth quarter of last year, following robust growth in the previous quarter. Short-term indicators suggest continued subdued GDP growth in the first quarter of 2019, as elevated Brexit-related uncertainty dampens consumption and investment. Despite slowing global growth momentum, UK exports rebounded strongly in the second half of the year, aided by a slight depreciation of the pound sterling. However, net trade continues to contribute negatively to growth, as imports rebounded even more strongly – in large part as a result of stockpiling by firms and consumers in anticipation of Brexit. After a slight up-tick in the middle of 2018, annual CPI inflation has continued to decline, falling to 1.8% in the first two months of 2019. This is well below the depreciation-induced peak at 3.0% seen one year earlier and reflects both the waning impact of earlier strong rises in import prices and rapid declines in energy prices from the autumn of 2018.

Economic growth is stabilising in China. Weaker activity in the manufacturing sector is partly offset by resilience in services. In the first two months of the year, industrial production softened further and fixed-asset investment growth recovered slightly, while growth in nominal retail sales remained robust. This mixed picture was confirmed by the manufacturing and services PMIs in the first quarter, with services holding up better. At the same time, trade activity has been very volatile in recent months, partly reflecting distortions related to the Lunar New Year. Following weak data for February, the authorities expect some rebound in March. Annual headline CPI inflation eased to 1.5% in February due to the sharp decline in food price contribution. Inflation excluding food and energy also slowed to 1.8%. At the same time, annual producer price inflation remained steady at 0.1% in February, as lower oil prices were offset by a price increase in the mining and quarrying sector.

Financial developments

Long-term yields have declined in the euro area and in the United States. During the period under review (from 7 March to 9 April 2019) the GDP-weighted euro area ten-year sovereign bond yield declined marginally to 0.72% (by around 5 basis points) in a context of decreasing global risk-free rates and stable or declining financial market volatility (see Chart 3). Ten-year sovereign bond yields fell by around 15 basis points in the United States and by slightly less than 10 basis points in the United Kingdom, to 2.50% and 1.10% respectively.


Chart 3

Ten-year sovereign bond yields

(percentages per annum)

Sources: Thomson Reuters and ECB calculations.
Notes: Daily data. The vertical grey line denotes the start of the review period on 7 March 2019. The latest observation is for 9 April 2019.

Developments in euro area sovereign bond spreads relative to the risk-free OIS rate showed some cross-country heterogeneity. Spreads on Italian sovereign bonds rose by 16 basis points, to just above 2.2%, while those on Spanish bonds rose by 10 basis points, to 0.74%. German spreads rose marginally, by 2 basis points, to -0.34%, while French spreads remained unchanged at around zero. By contrast, spreads on Portuguese sovereign bonds declined by 7 basis points, to 0.86%.

Broad indices of euro area equity prices rose amid lower risk-free rates and in an environment of broadly stable volatility. Over the review period equity prices of euro area banks and non-financial corporations increased by 3.4% and 2.9% respectively. Despite some negative macroeconomic surprises, which led to swings in equity valuations, equity prices rose throughout the review period. This was possibly on account of the declines in risk-free rates in the context of stable and historically low expectations among market participants regarding future equity volatility. Among other factors, continued positive earnings and fewer concerns about geopolitical tensions also contributed to support equity valuations.

Euro area corporate bond spreads narrowed somewhat over the review period. Reflecting the abovementioned gains in equity prices, the spread on investment-grade NFC bonds relative to the risk-free rate has declined by around 10 basis points to stand at 70 basis points since early March. Yields on financial sector debt have also fallen by around 12 basis points to 89 basis points. Overall, although corporate bond spreads are currently higher than the temporary lows reached in early 2018, they remain some 30 basis points below the levels observed in March 2016, prior to the announcement and subsequent launch of the corporate sector purchase programme.

The euro overnight index average (EONIA) stood, on average, at -37 basis points over the review period. Excess liquidity increased by approximately €6 billion to stand at around €1,904 billion.

The EONIA forward curve shifted downwards over the review period. The downward movement of the curve peaked at around 15 basis points for maturities close to five years. Overall, the curve remains at below zero for horizons up to the end of September 2022, reflecting market expectations of a prolonged period of negative interest rates.

In foreign exchange markets, the euro remained broadly unchanged in trade-weighted terms (see Chart 4). Over the review period the nominal effective exchange rate of the euro, as measured against the currencies of 38 of the euro area’s most important trading partners, appreciated by 0.1%. This reflected a modest strengthening of the euro against the US dollar (by 0.1%) and the Chinese renminbi (by 0.1%), as well as a more pronounced appreciation against the pound sterling (by 0.5%) and the currencies of most other non-euro area EU Member States (with the exception of the Swedish krona and the Polish zloty). These developments were only partly offset by a depreciation of the euro against other major currencies, notably the Japanese yen (by 0.4%) and the Swiss franc (by 0.7%), as well as against the currencies of some emerging market economies.


Chart 4

Changes in the exchange rate of the euro vis-à-vis selected currencies

(percentage changes)

Source: ECB.
Notes: “EER-38” is the nominal effective exchange rate of the euro against the currencies of 38 of the euro area’s most important trading partners. All changes have been calculated using the foreign exchange rates prevailing on 9 April 2019.

Economic activity

The slowdown in euro area growth has continued, as incoming data have overall been weaker than expected in the first quarter of 2019. Real GDP increased by 0.2% in quarter-on-quarter terms in the last quarter of 2018, only marginally up compared with the previous quarter, but still below the economic expansion observed in the first half of last year (see Chart 5). Domestic demand and net trade contributed positively to GDP growth in the fourth quarter, while changes in inventories had a substantial curtailing effect. In annual terms, this resulted in a 1.8% increase in real GDP in 2018, which is well below the 2.4% rate of growth recorded in the previous year. Although soft economic indicators remain robust overall compared with historical averages, they have continued to fall short. Particular vulnerabilities in the manufacturing and tradable goods sectors reflect a downturn in external demand which, combined with some country and sector-specific factors, suggests a continued weak growth momentum in the first quarter of 2019.


Chart 5

Euro area real GDP and its components

(quarter-on-quarter percentage changes and quarter-on-quarter percentage point contributions)

Source: Eurostat.
Note: The latest observations are for the fourth quarter of 2018.

Consumer spending continued to rise, albeit at a lower growth rate than in previous years. Private consumption rose by 0.2%, quarter on quarter, in the final quarter of 2018, following a slightly lower rate of increase in the previous quarter. The main factors behind the recent weakness in consumption have been the higher oil price in the first half of 2018, delivery bottlenecks in the car industry, increased macroeconomic uncertainty and some country-specific factors. On an annual basis, consumption rose by 1.0% in the fourth quarter of 2018, which is the same rate as in the previous quarter. Annual growth of households’ real disposable income accelerated from 1.5% in the third quarter of 2018 to 1.7% in the fourth quarter. Disposable income continues to be supported mainly by steady labour income growth, reflecting the robustness of the labour market. Consequently, the saving ratio (expressed as a four-quarter moving average) increased from 12.0% in the third quarter of 2018 to 12.1% in the fourth quarter.

Euro area labour markets remain robust, despite some slowdown. Employment increased by 0.3% in the last quarter of 2018, following an increase of 0.2% in the third quarter. Overall, employment increased by 1.5% in 2018. Employment growth slowed down somewhat in the second half of 2018, but remained strong compared with developments in GDP growth. Continued employment growth combined with a drop in GDP growth in 2018 led to a moderation in productivity growth, following a modest pick-up in 2017. This may partly reflect the fact that adjustments in employment tend to lag behind changes in output. One reason for this may be that firms are cautious in their recruitment decisions, in part owing to limited flexibility regarding adjustments to longer-term employment contracts.

Recent short-term labour market indicators continue to point to positive but moderating employment growth in the first quarter of 2019. The euro area unemployment rate stood at 7.8% in both January and February 2019, down from 7.9% in the last quarter of 2018. This, together with the survey indicators on employment, points to further employment growth, but at a lower rate than before.


Chart 6

Euro area employment, Purchasing Managers’ Index assessment of employment, and the unemployment rate

(left-hand scale: quarter-on-quarter percentage changes; diffusion index; right-hand scale: percentage of labour force)

Sources: Eurostat, Markit and ECB calculations.
Notes: The Purchasing Managers’ Index (PMI) is expressed as a deviation from 50 divided by 10. The latest observations are for the fourth quarter of 2018 for employment, March 2019 for the PMI and February 2019 for the unemployment rate.

Private consumption is expected to continue to rise at robust rates. Recent data on retail trade and new passenger car registrations point to continued growth in consumer spending in the first quarter of this year. The latest survey results signal ongoing, albeit moderating, employment growth. This should continue to support household income and thus consumer spending. Moreover, households’ net worth continued to increase in the fourth quarter of 2018, thereby providing further support to private consumption. Considered together, these factors should explain why during the first quarter of 2019 consumer confidence partly recovered from its decline over the course of 2018 and continued to stand at a level well above its long-term average.

Business investment slowed in the fourth quarter of 2018, and short-term indicators point to a possible further slowdown in the first quarter of 2019. Despite remaining positive, quarter-on-quarter non-construction investment growth declined from 1.0% in the third quarter of 2018 to 0.4% in the fourth quarter of 2018. Available short-term indicators for the first quarter of 2019 also point to a weakening in growth. Compared with the fourth quarter of 2018, available data for the first quarter of 2019 suggest a fall in the production of capital goods. This also reflects the recorded decline in industrial confidence as well as higher financial volatility. On a more positive note, capacity utilisation remains high, pointing to supply-side constraints which might call for increased investment. Looking forward, investment dynamics are expected to remain moderate. As the business cycle matures, business investment is expected to decelerate in tandem with weakening external and domestic demand. In this context, the assessment of export order books and production expectations in the capital goods sector points to continued weakness so far in 2019. By contrast, while profit dynamics (i.e. internal funds for investment) slowed, banks continued to report a positive net demand for loans used for investment purposes in the first quarter of 2019.

Euro area trade regained some momentum at the start of 2019 but according to leading indicators it may be short-lived. According to the latest monthly nominal data (for January 2019), intra-euro area exports recovered by 1.5%, month on month, following a decrease of 0.6% in December 2018. Extra-euro area exports expanded at a stronger rate of 0.8%, month on month, compared with 0.3% in December 2018. Growth in total imports remained weak in January 2019 at 0.3% in month-on-month terms, up from 0.1% in December 2018. Intra-euro area and extra-euro area flows advanced at the same pace. While euro area trade in goods strengthened at the start of 2019, the recovery was nevertheless insufficient to fuel stronger growth over the first quarter. Looking forward, euro area trade is expected to remain weak in the first part of 2019.

The latest economic indicators suggest a sizeable moderation in the pace of economic expansion. Industrial production (excluding construction) experienced a rebound in the first quarter of 2019. Production showed positive signs for the first time since 2017, increasing slightly by 0.4% in quarter-on-quarter terms compared with the 1.2% drop in the fourth quarter of 2018. Survey data signal a slowdown in growth dynamics in the near term. The composite output Purchasing Managers’ Index (PMI) averaged 51.5 in the first quarter of 2019, compared with 52.3 in the fourth quarter of 2018. Meanwhile, the European Commission’s Economic Sentiment Indicator (ESI) dropped to an average of 106.0 in the first quarter of 2019, compared with 108.9 in the fourth quarter of 2018. While the ESI stood above its long-term average, the PMI remained between the threshold of 50 (which separates contraction from expansion in activity) and its historical average of 52.9.

This moderation reflects in part a slowdown in external demand, compounded by some country and sector-specific factors. While the impact of some country and sector-specific idiosyncratic factors on economic activity is dissipating, global headwinds continue to weigh on euro area growth and the rebound is sluggish. Overall, growth is expected to continue at a slow pace.

Looking forward, the ECB’s monetary policy measures will continue to back domestic demand. Private consumption is supported by healthy labour market conditions and ongoing employment gains. Residential investment should continue to improve, supported by growing household wealth. Business investment is expected to continue to expand, albeit at a subdued pace, driven by high levels of capacity utilisation and supportive financing conditions. In addition, although the outlook for global trade has weakened, the expansion in global activity is expected to continue. The results of the latest round of the ECB Survey of Professional Forecasters, conducted in April 2019, show that private sector GDP growth forecasts for 2019 and 2020 were revised down by 0.3 and 0.1 percentage points respectively, compared with the previous round conducted in late January. At the same time, the figure for 2021 remained unchanged at 1.4%.

The risks surrounding the euro area growth outlook remain tilted to the downside. This reflects the persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets.

Prices and costs

According to Eurostat’s flash estimate, euro area annual HICP inflation declined to 1.4% in March 2019, from 1.5% in February (see Chart 7). This decline took place despite higher energy price inflation and reflected lower food price inflation and, more especially, lower HICP inflation excluding energy and food.


Chart 7

Contributions of components of euro area headline HICP inflation

(annual percentage changes; percentage point contributions)

Sources: Eurostat and ECB calculations.
Notes: The latest observations are for March 2019 (flash estimates). Growth rates for 2015 are distorted upwards owing to a methodological change (see the box entitled “A new method for the package holiday price index in Germany and its impact on HICP inflation rates”, Economic Bulletin, Issue 2, ECB, 2019).

Measures of underlying inflation remained generally muted and continued their recent sideways movement. HICP inflation excluding energy and food declined to 0.8% in March, from 1.0% in February. The extent to which this decline was affected by developments in more volatile prices, for instance for travel and clothing, or by the timing of the Easter holidays, can be assessed only with the release of the full HICP breakdown. Other measures of underlying inflation, including the Persistent and Common Component of Inflation (PCCI) indicator and the Supercore indicator[1], which are only available for the period to February, also pointed to a continuation of the broad sideways movement of recent months. Nonetheless, all of the statistical and model-based measures remained above their respective lows in 2016. Looking ahead, measures of underlying inflation are expected to increase gradually, driven by stronger wage growth and the pick-up observed in domestic producer price inflation.

Supply chain price pressures for HICP non-energy industrial goods continued to increase. This build-up is visible in the later stages of the supply chain, with domestic producer price inflation for non-food consumer goods increasing further to 1.1% in February, its highest rate since March 2012 and twice its historical average. Import price inflation for non-food consumer goods also continued to strengthen further in February, standing at 1.2%, up from 0.8% in January. At the very early stages of the pricing chain, price pressures recovered somewhat; the annual percentage changes in both oil and non-oil commodity prices moved back into positive territory in February and continued to increase in March.

Recent developments in wage growth continue to support the notion of a gradual build-up in domestic cost pressures. Annual growth in compensation per employee was 2.2% in the fourth quarter of 2018, remaining above its long-term average. The decline from 2.5% in the previous quarter was linked to one-off payments in that quarter. As negotiated wage growth had continued to increase, rising from 2.1% in the third quarter of 2018 to 2.2% in the fourth quarter, the decline in growth of compensation per employee was reflected in a declining wage drift. More generally, wage growth indicators now stand visibly higher than in the first half of 2016. These developments are in line with increasing tightness in the labour market.

The impact of rising labour cost pressures on overall domestic price developments was cushioned by profit margins. Price pressures as captured in unit labour costs continued to intensify in the fourth quarter of 2018, mainly reflecting a continued weakening in labour productivity growth. Notwithstanding, the annual percentage change in the GDP deflator remained relatively stable, hovering between 1.3% and 1.5% in 2018, as the overall weakening in the cyclical momentum of the economy, together with deteriorations in the terms of trade (related particularly to the past increases in oil prices), weighed on profit margin developments.

Market-based measures of longer-term inflation expectations declined, while survey-based expectations remained stable. The five-year forward inflation-linked swap rate five years ahead stood at 1.36%, around 15 basis points lower than the level prevailing in early March (see Chart 8). Despite its further decline, which continues a downward trend beginning in November 2018, the risk-neutral probability of negative average inflation over the next five years, implied by inflation options markets, remains negligible. Nevertheless, the forward profile of market-based measures of inflation expectations continues to point to a prolonged period of low inflation with only a very gradual return to inflation levels below, but close to, 2%. The results of the ECB Survey of Professional Forecasters (SPF) for the second quarter of 2019 show average headline inflation expectations for the euro area of 1.4% in 2019, 1.5% in 2020 and 1.6% in 2021. This represents downward revisions of 0.1 percentage points for each of these years compared with the previous survey, mainly attributable to a weaker growth outlook and downward surprises in recent inflation outcomes. According to the SPF, average longer-term inflation expectations remained at 1.8%.


Chart 8

Market and survey-based measures of inflation expectations

(annual percentage changes)

Sources: ECB Survey of Professional Forecasters (SPF), ECB staff macroeconomic projections for the euro area and Consensus Economics.
Notes: The SPF survey for the second quarter of 2019 was conducted between 18 and 22 March 2019. The market-implied curve is based on the one-year spot inflation rate and the one-year forward rate one year ahead, the one-year forward rate two years ahead, the one-year forward rate three years ahead and the one-year forward rate four years ahead. The latest observations for market-implied inflation are for 9 April 2019.

Money and credit

Broad money growth rebounded in February. The annual growth rate of M3 increased to 4.3% in February from 3.8% in January, thereby continuing to hover around the rates observed since early 2018 (see Chart 9). The phasing-out of net asset purchases at the end of 2018 has led to a smaller positive impact of the asset purchase programme (APP) on M3 growth. The annual growth rate of M1, the main contributor to M3 growth from a component perspective, increased to 6.6% in February (up from 6.2% in January). Given that real M1 growth tends to lead real GDP growth by about one year (see Box 4 “The predictive power of real M1 for real economic activity in the euro area”), these developments are consistent with the current moderation in real economic activity. Looking ahead, the current level of real M1 growth indicates a low probability of a recession in the euro area in the coming year.


Chart 9

M3 and its counterparts

(annual percentage changes; contributions in percentage points; adjusted for seasonal and calendar effects)

Source: ECB.
Notes: Credit to the private sector includes MFI loans to the private sector and MFI holdings of securities issued by the euro area private non-MFI sector. As such, it also covers the Eurosystem’s purchases of non-MFI debt securities under the corporate sector purchase programme. The latest observation is for February 2019.

M3 growth remained resilient to the fading-out of the contribution of the APP. From a counterpart perspective, the positive contribution to M3 growth from general government securities held by the Eurosystem decreased further (see the red bars in Chart 9) in the context of the aforementioned phasing-out of net purchases under the APP. Until October 2018 it had been largely offset by an increase in the contribution from credit to the private sector (see the blue bars in Chart 9). While credit to the private sector has remained the largest driver of broad money growth in recent months, its contribution has stagnated. Since October 2018 an increasingly positive contribution from net external assets (see the yellow bars in Chart 9) – which, among other things, reflects a reduced preference on the part of euro area investors for foreign assets – and a declining drag from credit to the government from euro area monetary financial institutions (MFIs) excluding the Eurosystem (see the light green bars in Chart 9) have contributed to the resilience of M3 growth. At the same time, increasing issuance activity of MFI longer-term debt securities has somewhat dampened money creation (see the dark green bars in Chart 9).

Following a decrease in January, the annual growth of loans to the private sector increased again in February. The annual growth rate of MFI loans to the private sector (adjusted for loan sales, securitisation and notional cash pooling) increased to 3.2% in February from 3.0% in January (see Chart 10). This was due to a rebound in the annual growth rate of loans to NFCs, which increased to 3.7% in February from 3.4% in January, mainly reflecting a base effect. Looking beyond short-term volatility, the annual growth rate of loans to NFCs has been on a moderating path in recent months, in line with the typical lagged reaction to the slowdown in economic activity observed since early 2018. At the same time, the annual growth rate of loans to households remained stable at 3.3% in February. The expansion in loan growth has been supported by the significant decline in bank lending rates across the euro area since mid-2014 (notably owing to the ECB’s non-standard monetary policy measures) and by overall improvements in the supply of, and demand for, bank loans. In addition, banks have made progress in consolidating their balance sheets, although the volume of non-performing loans (NPLs) remains high in some countries and may constrain financial intermediation.[2]


Chart 10

Loans to the private sector

(annual growth rate)

Source: ECB.
Notes: Loans are adjusted for loan sales, securitisation and notional cash pooling. The latest observation is for February 2019.

According to the April 2019 euro area bank lending survey , loan growth continued to be supported by favourable overall bank lending conditions and increasing demand for housing loans. In the first quarter of 2019 credit standards for loans to enterprises remained broadly unchanged, which was somewhat more favourable than expected by banks in the previous survey round. At the same time, credit standards for households tightened. Banks’ cost of funds and balance sheet constraints contributed to a tightening of credit standards across all loan categories, while competitive pressures continued to contribute to an easing of credit standards. Net demand for loans to enterprises remained stable in the first quarter of 2019, after having increased since the second quarter of 2015, and was mainly supported by the low general level of interest rates. At the same time, net demand for housing loans continued to increase in the first quarter of 2019, also driven mainly by the low general level of interest rates. Euro area banks again confirmed that the ECB’s asset purchase programme had a positive impact on their liquidity position and market financing conditions and a negative impact on their profitability over the past six months, which included the Eurosystem’s net asset purchases until December 2018. The APP had an easing impact on banks’ credit terms and conditions and a positive impact on their lending volumes. In addition, while the ECB’s negative deposit facility rate (DFR) had an adverse impact on banks’ net interest income, it continued to support lending.

Very favourable lending rates continued to support euro area economic growth. In February 2019 the composite bank lending rate for loans to NFCs remained broadly stable at 1.65%, which is close to its historical low in May 2018. The composite bank lending rate for housing loans remained stable in February at 1.80%, also close to its historical low in December 2016 (see Chart 11). Composite bank lending rates for loans to NFCs and households have fallen significantly and by more than market reference rates since the ECB’s credit easing measures were announced in June 2014. The reduction in bank lending rates for loans to NFCs, as well as for loans to small firms (assuming that very small loans of up to €0.25 million are primarily granted to small firms), was particularly significant in those euro area countries that were most exposed to the financial crisis. This indicates a more uniform transmission of monetary policy to bank lending rates across euro area countries and firm sizes.


Chart 11

Composite bank lending rates for NFCs and households

(percentages per annum)

Source: ECB.
Notes: Composite bank lending rates are calculated by aggregating short and long-term rates using a 24-month moving average of new business volumes. The latest observation is for February 2019.

In January 2019 net issuance of debt securities by euro area NFCs recovered part of the decline that occurred during the last quarter of 2018. The latest ECB data indicate that, on a net basis, the total flow of debt securities issued by NFCs in January 2019 turned positive again after being negative in the last two months of 2018. This is in line with the seasonal patterns observed over the last few years, in which issuance at the beginning of the year has tended to rebound following a period of weakness in the last few months of the previous year. From a more medium-term perspective (see Chart 12), the annual flows of debt securities were slightly above €40 billion in January 2019, close to the level at which the annual flows of debt securities seem to have settled since November 2018. Available market data suggest that net flows of debt securities issued continued to be relatively strong in February but moderated in March 2019, albeit remaining positive. In January 2019 total net issuance of quoted shares by NFCs continued the decline from its recent peak in the summer of 2018. Nevertheless, the annual flows of net issuance of quoted shares remained high and close to the levels recorded in 2014.


Chart 12

Net issuance of debt securities and quoted shares by euro area NFCs

(annual flows in EUR billions)

Source: ECB.
Notes: Monthly figures based on a 12-month rolling period. The latest observation is for January 2019.

Financing costs for euro area NFCs declined marginally in January 2019 from the level recorded at the end of the previous year. The overall nominal cost of external financing for NFCs, comprising bank lending, debt issuance in the market and equity finance, declined to 4.7% in January and is projected to have declined significantly further in February and March 2019. The cost of financing in March 2019 is estimated to be only 16 basis points above the historical low of December 2014 and much below the levels observed in the summer of 2014. The estimated decrease in the cost of financing since the end of the fourth quarter of 2018 reflects a decrease in both the cost of equity and the cost of market-based debt. The decline in both measures is mainly accounted for by the decline in the long-term risk-free rate and, to a somewhat lesser extent, by the decline in risk premia.


What the maturing tech cycle signals for the global economy

Prepared by Marcel Tirpák

A maturing tech cycle has been one of the factors behind the significant trade slowdown in China at the turn of the year. The tech cycle argument rests on the fact that China and other key Asian economies, including Japan, are closely integrated through supply chains concentrated, especially, in the production of computers and other electronic devices – the tech sector[3]. The maturing tech cycle may reflect a number of factors: it could be associated with more structural sector-specific drivers, such as the possibility of an increasing level of saturation in the global market for smartphones and for new data centres; it could relate to mini-cycles linked to the launch of new models of tech products; or it may signal, more generally, a turn in the global business cycle. This box reviews basic characteristics of the Asian tech sector and shows that it has played an important role in the recent weakness in China’s trade. At the same time, the box also suggests that the trend in the global tech cycle associated with weaker trade in Asia may be bottoming out.


Emerging market currencies: the role of global risk, the US dollar and domestic forces

Prepared by Massimo Ferrari

Exchange rate movements against the US dollar are an important factor shaping the outlook in emerging market economies as a large share of their credit, trade and debt is priced in dollars. Abrupt swings in emerging market exchange rates are typically linked to capital outflows, tighter financing conditions and heightened financial instability. The drivers of those movements are, however, difficult to disentangle, as global and domestic forces jointly determine the relative strengths of these currencies. This box presents a methodology for separating out the four main drivers of emerging market exchange rate swings: spillovers from US shocks, global risk appetite, interest rate effects and idiosyncratic domestic shocks. It uses the methodology to analyse the factors behind the sharp depreciation and subsequent recovery of emerging market currencies over the course of 2018.


Exploring the factors behind the 2018 widening in euro area corporate bond spreads

Prepared by Lena Boneva, Gregory Kidd and Ine Van Robays

Global corporate bond spreads trended upwards over the course of 2018. Euro area investment grade non-financial corporate (NFC) bond spreads increased by around 60 basis points and peaked at just above 1%, close to the levels which had prevailed prior to the announcement of the ECB’s corporate sector purchase programme (CSPP) in March 2016 (see Chart A). Spreads on non-investment grade NFC debt widened more significantly, by around 200 basis points, and peaked at around 4%. The trend increase in euro area NFC bond spreads mirrored developments in global corporate bond markets; in the United States and the United Kingdom, spreads increased by around 80 and 60 basis points over the same time frame and peaked at 1.80% and 2.10%, respectively. Since the turn of the year, global NFC bond spreads have reversed a large part of the 2018 increase but nevertheless remain at elevated levels relative to those which prevailed in 2017. Furthermore, the largely synchronised movement in global spreads over this time frame alludes to a role for a common global factor, rather than a euro area-specific driver.


The predictive power of real M1 for real economic activity in the euro area

Prepared by Alberto Musso

Real M1 growth in the euro area has been moderating in recent quarters, adding to concerns about the economic outlook given the robust relationship between the business cycle and narrow money. This box shows that the leading and pro-cyclical properties of real M1 for real GDP remain a robust stylised fact in the euro area. Moreover, there are indications that these properties reflect the predictive capacity of narrow money, beyond the influence of interest rates. At the current juncture, models exploiting the predictive power of real M1 suggest that the steady decline in real M1 growth from its most recent peak in mid-2017 points to very low risks of recession in the euro area up to the beginning of 2020.



The economic implications of rising protectionism: a euro area and global perspective

Prepared by Vanessa Gunnella and Lucia Quaglietti

The risk of a trade war came sharply into focus in 2018, as protectionist threats by the US Administration and its trading partners were followed by concrete actions. Tensions rose over the summer and, while these have been defused on some fronts, the risk of further escalation remains material. The impact of the measures implemented so far on the global and euro area economic outlooks is expected to remain contained. However, large negative effects could materialise if trade tensions were to escalate further. Uncertainty related to protectionism is weighing on economic sentiment and it may raise further, potentially eroding confidence and affecting the euro area and the global economy more significantly. The complexity of intertwined international production chains could also magnify the impact. Against this backdrop, this article reviews the changes in the trade policy landscape over the past decade. It discusses the macroeconomic implications of the recent surge in protectionism and evaluates the possible effects that an escalation in trade tensions could have on the global economy and the euro area.


Fiscal rules in the euro area and lessons from other monetary unions

Prepared by Nadine Leiner-Killinger and Carolin Nerlich

This article compares the fiscal rule framework in the euro area with the frameworks in the fiscally more integrated United States and Switzerland, with the aim of drawing lessons for ways in which fiscal rules could be reformed in European Economic and Monetary Union (EMU). Both the United States and Switzerland have a history of balanced budget rules that help stabilise government debt in individual states/cantons at moderate and broadly comparable levels. The recent shift towards balanced budget rules in the euro area is an important achievement in this direction, and has contributed to better average underlying budgetary positions. Still, the fiscal rule framework needs to be rendered more effective in reducing high levels of government debt and their dispersion across the euro area. Reducing the heterogeneity of government debt positions is also an important prerequisite for setting up a well-governed common macroeconomic stabilisation function at the centre of EMU in case of deep economic crises. This in turn would help to contain the procyclicality of fiscal rules at the country level.



Statistical annex

© European Central Bank, 2019

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All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged.

This Bulletin was produced under the responsibility of the Executive Board of the ECB. Translations are prepared and published by the national central banks.

The cut-off date for the statistics included in this issue was 9 April 2019.

For specific terminology please refer to the ECB glossary (available in English only).

ISSN 2363-3417 (html)

ISSN 2363-3417 (pdf)

DOI10.2866/285125 (html)

EU catalogue No QB-BP-19-003-EN-Q (html)

EU catalogue No QB-BP-19-003-EN-N (pdf)

  1. For more information on these measures of underlying inflation, see Boxes 2 and 3 in the article entitled “Measures of underlying inflation for the euro area”, Economic Bulletin, Issue 4, ECB, 2018.
  2. See also Chapter 3 of the “Financial Stability Review”, ECB, November 2018.
  3. For the purposes of this box, “tech sector” is used to refer to the manufacturing of computers, electronic and electrical equipment.